Novelist Terry Pratchett popularized a concept long familiar to economists and now known as the “boots theory of economics” (or, less pithily, the “boots theory of socioeconomic inequality”).
In short, if you pay $100 for a pair of boots that lasts you twenty years, you got a better deal than if you pay $20 for boots that only hold up for two years. The second pair is cheaper, but it also provides a lot less value. You’re getting less bang for your buck.
As with boots, value and “bang for the buck” are paramount considerations when evaluating term life insurance.
The basic idea behind term life is fairly straight-forward. In exchange for regular premium payments, the insurance company promises to pay out a death benefit if the insured person dies during the policy’s contractual coverage window (i.e., the “term”).
If the insured outlives the term, the policy expires without a payout.
Notwithstanding the simplicity of the concept, there are multiple criteria affecting whether a given term life policy is a “good deal.”
The cost of term life insurance, of course, is a major factor in the analysis.
But the cheapest policy isn’t always the best policy in every scenario.
Everything from coverage amount and term length to supplemental benefits and options need to be weighed when assessing a policy.
And, most important of all, you want to find a policy that provides the appropriate protection for your situation.
Top 10 Best Term Life Insurance Companies
Our current picks for the best term life insurance companies include:
- American General
- Banner Life
- Brighthouse Financial
- John Hancock
- Lincoln Financial
- Penn Mutual
- Principal Financial
- Protective Life
You can read more about each company above in our best term life insurance companies article.
Term Life Insurance Policy
It is important to consider the following features of a term life insurance policy.
Increased Value Through Conversion Options
Because one of the chief downsides of term life insurance is that it eventually lapses, the contractual right to trade term coverage for permanent life insurance can make a term policy more attractive.
Convertible term life insurance policies include a rider or other built-in language granting the policyholder the right to convert the term coverage into permanent life insurance.
The choice to convert and which company will depend on the insurance carrier you choose. Most companies allow you to convert to either universal life or whole life.
Depending on the insured’s age, the option may have to be exercised before a certain date or prior to expiration of the term.
Typically, the new whole life policy has a lower death benefit and/or higher premiums than the term coverage.
But the benefit of whole life is that it never expires—the coverage is guaranteed to stay in place no matter how long you live—and the premiums stay constant the entire time.
Whole life also accrues cash value that can be withdrawn or borrowed against, making it a valuable retirement-planning tool.
Convertible term life insurance is designed for people who want the higher death benefit of term life for a fixed duration (e.g., until the mortgage is paid off or the kids move out), with permanent, fixed-rate coverage on the backend.
If, for instance, you need a higher coverage level for income-replacement protection until retirement—and you also want permanent life insurance available to pay final expenses, taxes, or to fund a special needs trust for a disabled dependent—convertible term coverage might be a smart way to accomplish both objectives with a single policy.
Of course, you could just purchase a term policy and then get a new whole life policy once the term ends.
But in that scenario, you’ll have to go through the entire underwriting process again, likely including a medical examination, and there’s no guaranty that you’ll still qualify for coverage or be able to find a policy with affordable premiums.
With convertible term, you have a contractual right to exercise the conversion option, so you avoid the risk of being denied coverage.
And you typically pay lower premiums for a whole life policy converted from term than for a brand-new policy with comparable coverage.
Along with an applicant’s age and health status, the death benefit amount plays a huge role in determining the premium cost for a term life policy.
Basically, the higher the coverage, the higher the premiums will be.
A policy that’s a little cheaper but provides a lot less coverage offers less value than a policy that’s a little more expensive but with a significantly higher death benefit.
Ultimately, you want to purchase a policy that offers the level of financial protection necessary to meet your needs.
If your goal is to ensure the mortgage gets paid off if you die early, you’ll probably need less coverage than if you’re protecting against loss of a primary breadwinner’s income until the kids have grown up and moved out.
Some term policies have built-in or optional riders that increase the coverage amount for certain causes of death.
For example, a policy might have language doubling the payout if the insured dies as a result of an occurrence qualifying as an “accident.”
Riders providing for supplemental coverage in certain events increase both the cost and the overall value provided by a term policy.
Depending on the insured’s occupation and lifestyle—and the chance that the supplemental coverage will be triggered—the extra expense can easily be worth a moderately increased premium.
Insurers commonly offer terms as short as one year and as long as thirty years, with a few companies offering a 35 and 40 year term.
As a general rule, a longer term will require a higher premium because a policy is more likely to be triggered as the insured gets older.
However, longer terms can sometimes provide greater value if you know you’ll need the coverage for the entire period.
In most cases, you end up paying lower total premiums over the course of a thirty-year term than you’d pay for a policy with a ten-year term renewed twice (for 30 years of combined coverage).
The 10 year term life policy probably starts off cheaper, but each time it is renewed, the insurer reevaluates the risk and (almost always) increases the premiums.
The older you get, the more expensive it is to renew a term policy, and, as you reach retirement age, it gets harder to qualify for any term coverage at all.
Even guaranteed-renewal policies eventually reach a point where premiums are effectively unaffordable.
So, an applicant who is pretty sure he or she will need coverage over an extended period often saves money in the long run by paying the higher early premiums for an extended term.
Notably, though, some long-term policies allow for premium increases periodically throughout the term, so the analysis may change depending on whether premiums are fixed or subject to increase.
Increased Value Through Living Benefits
Living benefits are another important consideration when appraising the value provided by term life policies.
Plain, vanilla-flavored term life coverage only results in a payout if the insured individual dies during the policy’s term.
But a policy with living benefits has the potential to pay out even if the insured doesn’t die during the coverage window.
Depending on the situation and the policyholder’s needs, living benefits can end up substantially increasing the real value provided by a term policy.
Living benefits connected to term policies are usually implemented through riders accelerating death benefits under precisely defined circumstances.
That is, upon the occurrence of a specified event, the insurance company is required to pay out some or all policy proceeds, even if the insured person is still living.
For example, a critical illness rider might trigger a payout if the insured is diagnosed with one of several major medical conditions identified in the policy.
With most acceleration riders, amounts paid out early as living benefits are deducted from any subsequent death benefit paid out under the policy.
Insurance companies don’t all offer the same living benefits riders or charge the same premium for the riders they make available.
Some insurers include accelerated benefits such as terminal illness riders within their standard term coverage.
Most other riders allowing for early payment are optional–available for an increased premium.
Living benefits add to the overall economic utility of term life insurance by increasing the chance of a policy ultimately resulting in a payout.
A long-term disability rider, for instance, provides supplemental income if an insured develops a disability and is unable to work.
So, even if the insured doesn’t die during the term, the insurance company might still have to make payments under the policy.
As a result, a term policy with one or more living benefits riders might end up being a better option than a term policy that costs less but lacks any potential living benefits.
If the rider is ultimately triggered, the additional premium cost will have been money well spent.
Finding the “Best” Term Life Policy
It’s impossible to say that any single policy is the “best” term life insurance because a policy that’s perfect for one person might be wrong for someone else.
Instead, it’s better to think in terms of finding the right policy for each individual applicant. To do that, you need to start by identifying your objectives and priorities.
Life insurance companies don’t all operate in the same way, and some companies do certain things better than others.
One insurer might specialize in extended term policies while another offers a generous disability rider.
Once you’ve pinpointed your goals, you can focus on insurers that are good at the things that are important to you.
And, after you’ve narrowed down the policies that meet your coverage needs, you can compare premiums rates to find where the best value lies.
In the consumer age, it’s easy to get stuck in the trap of shopping exclusively based on price.
Nobody wants to pay too much, so it’s tempting to just go with whatever option is cheapest.
Whether you’re buying boots or life insurance, price is an important factor to consider, but it’s not the only factor.
An experienced life insurance professional can help you find term life coverage that presents the best value in your individual situation.
And that is where we come in.
At I&E, we will take the time to go over your options. You can ask any questions and our experienced life insurance professionals will help you make the best choice for you, based on your unique needs and goals.
So what are you waiting for? Give us a call today to experience the I&E difference.